Banerjee Inc.wants to maintain a target capital structure with 30% debt and 70% equity.Its forecasted net income is $550,000,and its board of directors has decreed that no new stock can be issued during the coming year.If the firm follows the residual dividend policy,what is the maximum capital budget that is consistent with maintaining the target capital structure?
A)$673,652
B)$709,107
C)$746,429
D)$785,714

Question

Quizplus · Accepted Answer

To maintain a target capital structure of 30% debt and 70% equity, Banerjee Inc. must allocate its financing accordingly. With a forecasted net income of $550,000 and no new stock issuance allowed, the entire equity portion of the capital budget must come from retained earnings. Given the 70% equity requirement, the maximum capital budget can be calculated as follows: $550,000 / 0.70 = $785,714. This calculation ensures that the equity portion (from retained earnings) aligns with the 70% equity target in the capital structure, making $785,714 the maximum capital budget that maintains the desired structure.